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Life annuity vs living annuity

Life annuity vs living annuity

Life annuity vs living annuity

When reaching retirement, we’ll almost all be faced with the choice of taking either a Guaranteed Annuity (also known as a Life Annuity) or a Living Annuity. But what are they and what are the differences between a life annuity vs living annuity?

Irrespective of other investments, if you are a member of a retirement fund (pension, provident, preservation or retirement annuity), you must use at least two-thirds of your fund proceeds to purchase an annuity at retirement. This annuity will provide you with a regular income (or pension) for the rest of your life.

It’s not an easy decision and thankfully not limited to just one or the other. You can take out both types of annuities concurrently or purchase a composite annuity (both living and guaranteed) under a single life assurance policy which is a bit of a hybrid product. See my updated article on how to choose an annuity.

So let’s look at a life annuity vs living annuity vs blended annuity.

A Guaranteed Annuity / Life Annuity

The guaranteed annuity is an insurance product that you purchase from a life assurance company. The life assurer guarantees to pay you a specified monthly pension for the rest of your life. This effectively insures you against the risks of living longer than expected, as well as the risk of using up your money too soon. On retirement, you would purchase the annuity by paying a lumpsum in exchange for the guaranteed monthly income (which would normally include an annual increase).

Several factors are considered when determining your monthly pension, including:


You’ll receive a guaranteed monthly pension for as long as you live.


With this product your money dies with you and no money passes onto your heirs.

A Living Annuity

The living annuity is an investment product. You invest your money and can withdraw a monthly (or annual) pension that suites your needs. You do however need to work within the confines of the prevailing regulations.


One has far greater flexibility in terms of investment choices and can decide on the monthly income required. Should you have money left in the fund after your death, this will be passed on to your nominated beneficiaries. Overall you have more control of your investment.


The risk of a living annuity is that you run out of funds and are left with no pension. This could be due to poor performance in the markets, withdrawing too much for your living expenses or simply by living longer than expected.

Some points to note:

A hybrid annuity, blended annuity

A hybrid annuity is really the best of both worlds. It’s the ability to purchase part of your annuity as a Living Annuity, and part as a Life Annuity. So it’s no longer a life annuity vs living annuity, it’s a blended annuity. The merging of both.

Making your decision

It’s not an easy decision to make. On one hand you have a guaranteed pension for life, but it does not transfer to your heirs. On the other hand is a more flexible investment with passes over to your beneficiaries, but you stand a risk of running out of money.

One should consider a host of factors specific to you: your health, age and life expectancy, existing investments, current income streams and the needs of your dependants. Also, where you plan to retire, how much you need and more subjectively, your investment outlook for the country.

If you plan to retire young, you should consider a low-cost living annuity as your age will be factored against you in a guaranteed annuity. If you’re older though, say in your seventies, the guaranteed annuity may be a better option as life expectancy has fallen and your monthly annuity will likely be more. You may also need your money sooner rather than later due to ill-health or other circumstances and in that case a living annuity with a flexible draw-down rate may suit you better.

There is no specific formula to apply when making this decision and it’s always best to discuss it with a trusted financial advisor. As a final thought, you can switch a living annuity into a guaranteed annuity at a later stage if you change your mind; but you cannot do the reverse.

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